Week5Discussion1ClassmateResponse

Week 5 – Discussion Forum 1Guided Response:Review the posts from your classmates and respond to at least two. Compare and contrast the points you and your classmates made regarding the impact of time value of money on capital investment decisions. Each response should have a minimum of 100 words.There are two of my classmate’s discussion that is on the this document. I need to respond to each one. Giancarlo Marchenaand Christopher RichGiancarlo MarchenaApr 29, 2020Apr 29 at 7:47amManage Discussion EntryAccording to Kenton (2020), the cost of capital is defined as the implied rate of return that would deem a project or capital investment to be sensible for a company’s financial future. The analysis needed to determine the cost of capital for any given expenditure must be rooted in the future financial benefit that the asset brings but what if secondary effects, are not easily quantified? This calls into question how a company views capital expenditure in the case where that entity may know that they can earn a rate of return higher than the cost of capital. One instance where this dilemma may arise is in corporate employee wellness programs. Any given company can spend large amounts of capital dedicated toward the betterment of the lives of their employees. These programs often involve incentives for health activities and health markers, funding for gym memberships or gym equipment and professional medical support any health problem. It is reasonable to think that these programs improve the lives of employees and in turn may produce a betterment in the productivity of employees. This result produces a positive financial impact for company but one that is not easily correlated nor is it easily quantified.Another example of this, that may be more quantifiable, is in the case where the asset being purchased increases the overall reliability of an entire operation. One instance of this would be a company deciding on whether to install a new production line of a product that they already make. The first benefit of this expenditure would be the additional units of added production that the facility may now be able to manufacture. The secondary benefits to consider would be the added reliability to the other lines already in operation. By adding a new line, this may be able to decrease the amount of production required from existing lines. This in turn would mean that existing lines have less breakdowns and maintenance costs associated with components. The reduction in costs may be estimated by the reduction in run time of these lines but that may only be a less than accurate estimate. Both examples depict situations where benefits of capital expenditure produce results that may not be easily quantified before the purchase. Each situation highlights that cost of capital may expand far beyond financially tangible benefits such that companies should consider. This indicates that financial managers should take into account factors such as total plant reliability and corporate employee impact when making decisions on capital investments.ReferencesKenton, W. (2020, April 23). Cost of Capital: What You Need to Know. Retrieved April 29, 2020, from https://www.investopedia.com/terms/c/costofcapital.aspChristopher RichTuesdayMay 5 at 9:02amManage Discussion EntryFinancial managers have a position that has high expectations and can certainly turn a situation negative quickly. This position is dealing with tons of money in some cases, and they need to do extensive research to ensure they make the correct moves to of course bring profit. In my opinion the instances where a company is clearly going to have a rate of return greater than the cost of capital, the questions are how much can we afford to invest in this particular product or service, and how quickly will we see the profits or return? If it is clear that the product will provide a quick profit, and will be used in a reasonable amount of time, the company can go big. If the company will take a short amount of time to see profit and get rid of the investment slowly, they may want to be conservative. Obviously a financial manager would purchase minimally if it is going to be a while before selling off all inventory, but enough to make a good return. Most of these scenarios are obvious questions a financial manager would generally consider. They would want to make sure they have enough money to keep business flowing as normal with incentives, employees, leases or payments on property etc. Another variable to consider is potential scope creep with something going wrong. Try to come up with potential negative scenarios where they would need to have money freed up or saved for incidentals if you will.